assessment task 3 - final report

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Will McGregor

Student Number- 100636175

Assessment Task 3 Individual Report – Australian Vintage Ltd

Client Investment Advice

Due: Midnight 18th October 2015

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Executive Summary

This report provides an analysis and evaluation of the historic and current financial position

of Australian Vintage Ltd. The business outline will explain the capabilities of Australian

Vintage Ltd. which range from vineyards, boutique and bulk wine production, packaging,

marketing and distribution and briefly touches on its exporting methods across the globe.

Analysis includes profitability trends using vertical analysis to show net profits continuing to

rise over a four year period. Current ratio analysis gives insight into the strong liquid

position Australian Vintage Ltd. sees itself which will see the business being able to manage

its short term liabilities. Gearing ratios are calculated which show a comfortable level of

gearing, mainly due to some recent capital raising through shares being issued while also

proving financial institutions are comfortable lending money to the company through the

borrowings that have recently been confirmed to continue.

The main sources of finance, being capital raising through an issue of shares and borrowings

are explained in the latter sections of the report. The major risk factors that Australian

Vintage Ltd. needs to monitor are the threats of global warming on vineyards, exchange rate

fluctuations and its ability to manage its finances due to seasonal and productions costs

fluctuating. The report will show how Australian Vintage Ltd. could minimise these risks

through a number of different strategies. Finally, recommendations will then be delivered

to my client to influence his decisions that Australian Vintage Ltd. is a strong company in a

sound financial position and one that should be invested in.

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Contents

Introduction 4

Australian Vintage Ltd – Business Outline and Strategy 4

Australian Vintage Ltd - Profitability trend and current situation 5

Australian Vintage Ltd - Liquidity trend and position 6

Australian Vintage Ltd - Financial gearing trend and its influence on future expansion decisions 7

Australian Vintage Ltd – Sources of finance 7

Australian Vintage Ltd – Major risks and future management strategies to minimise these risks 8

Global Warming 8

Exchange Rate Fluctuations 9

Financial Management 10

Australian Vintage Ltd – Final recommendations to client investment 10

Conclusion 11

References 12

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Introduction

This report will firstly explore Australian Vintage Ltd. as a business outlining the company’s

market and major business strategies. Profitability trends will be analysed and factors that

have contributed to the company’s current financial situation will be explained. The report

will continue by analysing liquidity trends and position, before going into further detail

around financial gearing and how this may influence future expansion of the business.

Identification and explanation of sources of finance used by Australian Vintage Ltd. will be

detailed while also looking into major risks that the company may face into the future. How

the company can manage that risk, as well as all of the above factors, will help determine

the purpose of this report; whether or not Australian Vintage Ltd. as a company is a smart

investment choice for my client.

Guidance will be given to my client to determine whether Australian Vintage Ltd. is a safe

and secure business that is worth investing in. Finally, the report will include a final

recommendation as to whether or not Australian Vintage Ltd. represents a sound

investment.

Australian Vintage Ltd – Business Outline and Strategy

Australian Vintage Ltd. is a leading Australian wine company (Australian Vintage Limited

2015). The business capabilities extends from vineyards, boutique and bulk wine

production, packaging, marketing and distribution and deals with large domestic and

international customers. As one of Australia’s largest vineyards, the company produces

wines and exports all over the world and has recently won multiple industry awards.

Contract processing, vineyard management, contract packaging and concentrate are other

extensive services and capabilities the business offers. (Australian Vintage Limited 2015)

Australian Vintage Ltd. crushes approximately 10% of Australia’s total annual production,

proving the company’s capabilities are extensive. The company’s vineyards branch across

South Eastern Australia and operates all year round from two state of the art wineries with

over 2,700 hectares under vine. (Australian Vintage Limited 2015).

Australian Vintage Ltd. Corporate strategy extends to ensuring the business practices are

environmentally sustainable through things such as recycling, water management, using

renewable energy sources and using digital technology instead of hard copies (Australian

Vintage Limited 2015).

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Australian Vintage Ltd - Profitability trend and current situation

Australian Vintage Ltd is currently in an excellent financial situation. During recent analysis

of Australian Vintage Ltd.’s income statement, a completed vertical analysis showed a

gradual increase in the business’ net profit over the four years of business operation. Figure

1.0 shows that net profit has increased in 2011 from $6.564 million to $10.544 million in

2014 (Duncan 2015).

Income Statement (in $000’s)

2011 % 2012 % 2013 % 2014 %

Net profit for the year $6,564 2.9% $7,067 3.1% $7,070 3.4% $10,544 4.9%

Figure 1.0 shows a 2% increase in net profit over the four years of business operation.

Australian Vintage Ltd.’s brand has continued to grow in overseas markets (Ferrier 2014). In

August, the company announced that it signed a long term strategic China wide agreement

with COFCO Wine and Spirits which would see the company export wine to the world’s most

populous country, projected to reach 1.39 billion people by the end of 2015. (Xinhua 2010)

According to Cook (2014), the key to exporting success is to have a long term commitment

by developing an export strategy. As Australian Vintage Ltd. has the long term strategy with

China, they have greatly enhanced the chances of long term financial stability. Ferrier

(2014) who is the Chairman of Australian Vintage Ltd. explained in his 2014 Chairman’s

report that the company has also increased its presence in the United Kingdom and Europe,

focusing on the major supermarkets. This has in turn increased sales and distribution in

Australia, New Zealand, Asia and North America markets with a world wine production

increase of 9% in 2013. (Ferrier 2014)

According to “Grape Growing in Australia” industry report (Tonkin 2015, p. 7) profit margins

have fallen over the past five years; due to an oversupply of grapes, falling domestic grape

prices and rising input costs. While other businesses have been forced to leave the industry

during the past five years, Australian Vintage Ltd. has continued to increase its net profit by

strategies such as increasing exportation overseas.

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Australian Vintage Ltd - Liquidity trend and position

The liquidity position of Australian Vintage Ltd. looks strong based on analysis using current

ratio. The current ratio assesses a business’ liquid assets against its short term liabilities to

determine whether the business can meet its short term financial commitments (Atrill et al

2015, p. 265). Generally speaking, an ideal ratio current ratio is 2:1. By looking at Figure

2.0, you can see that Australian Vintage Ltd. over the last four years has averaged a current

ratio of just over four (Duncan 2015). This shows that the company has four times the

amount of current assets than liabilities. In a company such as Australian Vintage Ltd. the

reason for having a large amounts of assets is that they could be holding stock. For

example, it may take a number of years for a particular vintage to mature and be able to

sell. One particular wine brand, McGuigan, has increased its sales by 46% over the last two

years, which may be one reason the business is liquid (Australian Vintage Limited 2015).

Another reason may be, that the current price of wine is weak and the company is waiting

for a price increase before sales commence.

Liquidity

Current ratio CA/CL (times eg 2011 4.12:1)

2011 2012 2013 2014

4.12 3.60 4.46 4.21 Figure 2.0 shows the business is liquid using current ratios

In 2011, the company sold one of its assets, Loxton Winery. In 2014, the company

announced the sale of another underutilised Yaldara winery for $15.5 million (Ferrier 2014,

p. 3). These sales helped the business to meet its short term obligations from its liquid

assets. A business may fail if it cannot meet its maturing obligations.

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Australian Vintage Ltd - Financial gearing trend and its influence on future expansion decisions

“Financial gearing occurs when a business is financed, at least in part, by contributions from

outside parties, typically borrowings” (Atrill et al 2015, p. 266). The gearing ratio for

Australian Vintage from 2011 until 2014 has been calculated and displayed in Figure 3.0 and

shows there has been a gradual increase in the percentage of gearing (Duncan 2015).

Gearing

Gearing ratio (NC Debt only/(Equity + NC Debt)

2011 2012 2013 2014

28.05% 36.88% 34.96% 41.52% Figure 3.0 shows that the gearing of the company has steadily increased in a four year period.

Typically, the lower the gearing ratio, the less risk there is for shareholders to invest in the

company. Recent capital raising through issuing shares has reduced the gearing ratio to a

more comfortable level for Australian Vintage Ltd. (Ferrier 2014, p. 3). There has been no

negative impact on future expansion in the business which is evident by increasing their

markets to Asia. The company’s lenders are also satisfied with the gearing ratio percentages

as they have continually financed the company over the last four years. A confirmed three

year borrowing facility has been finalised (Ferrier 2014, p. 3) in 2014, proving that the bank

has faith in the company’s long term financial position.

Benefits to shareholders come from tax deductibility of interest on borrowings as interest

rates on borrowings are generally low when compared to the returns the business can earn

(Atrill et el 2015, p. 268). The banks can see that profitability trends continue to rise for

Australian Vintage Ltd. which is why they are comfortable loaning more money as a source

of finance for the business.

Australian Vintage Ltd – Sources of finance

There are a number sources of finance that Australian Vintage Ltd. could use to help

improve its current financial situation. It is important to note that there are both internal

and external sources of finance (Atrill et al. 2015, p. 470). Internal sources of finance do not

require the agreement of anyone other than the directors and managers of the business

whereas external sources of finance may require compliance from potential shareholders

(Atrill et al. 2015, p. 470).

A major source of external financing that Australian Vintage Ltd. used in 2013 was capital

raising. In 2013, the company successfully completed a capital raising for $40 million with

good institutional and retail support (Ferrier 2014, p. 3). This capital was raised by issuing

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shares which further reduced debt in the company. This resulted in the company’s gearing

decreasing from 59% in June 2013, to 39% in June 2014 (Ferrier 2014, p. 3). The capital

raised by Australian Vintage Ltd was used to reduce debt while also retaining cash. Issuing

shares can come in the form of ordinary shares, which can be a valuable source of financing

due to potentially avoiding paying a dividend (Atrill et al. 2015, p. 473).

Another external source of financing that Australian Vintage Ltd. uses is borrowings.

Negotiations have concluded with the company’s banker and it has now been confirmed a

new three year borrowing facility has been finalised (Ferrier 2014, p. 3). This proves that

the bank has faith in the company’s long term financial position. Just like other companies,

Australian Vintage Ltd. rely on borrowings to finance future operations and now have this

guarantee. Reviewing the 2012, 2013 and 2014 annual reports of Australian Vintage Ltd, it

is evident that the companies banking facilities have continued to offer finance.

Other sources of finance that Australian Vintage Ltd. could use would be to retain earnings.

The company has recently paid a dividend of 2.2 cents (ASX Limited 2015) but may want to

consider not distributing funds to shareholders to increase its own funds (Atrill et al 2015, p.

471). This strategy is adopted by most companies.

One key source of finance that Australian Vintage Ltd. could use is reduced inventory levels.

A winery business of this size is always going to have large amounts of its assets in the form

of inventory. By reducing the amount of stock on hand, or a particular vintage release,

funds may become available to use for other purposes. Funds may be tied up and cannot be

used for more profit gains (Atrill et al 2015, p. 471) if stock is held too long and cannot be

sold.

Australian Vintage Ltd – Major risks and future management strategies to minimise these risks

Global Warming

One major risk to that Australian Vintage Ltd. may face in the long term is the gradual rise in

temperature, commonly known as global warming. Gaidos (2010) believes that before the

end of the century, Western Australian’s famous wine regions known for its cabernet

sauvignon or shiraz as researchers found the acidity and concentration of a compound that

gives red wine its colour could drop below thresholds to maintain high-quality wine. Global

warming may also increase extreme weather events such as heat waves and hailstorms

which can shut down photosynthesis and damage grapes respectively. (Gaidos 2010). A

possible strategy to counter this long term global warming effect is to purchase land and

vineyards in areas less effected by climate change, therefore minimising the risk and

increasing the life of Australian Vintage Ltd. as a business.

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Doctor Leanne Webb, who is a former viticulturist and now researcher believes more

damage to vineyards occurs where water is unavailable, grapevine rows were planted in a

north- south direction and bunches were exposed to the sun’s radiation. (Wine industry

working towards climate change adaptation 2009). Strategies to counter can include the

purchase of water or large tanks to store this water. Looking into the 2014 Annual Report,

the balance sheet shows the company has spent over $8 million on water licences to ensure

a more than adequate supply of water (Australian Vintage 2015). Planting vines in an east-

west direction and growing vines with a large leaf cover to protect grapes will not allow as

much sun damage on the grapes. An alternative to this is to develop portable shade covers

to alter the climate grapes are grown under which a strategy is employed by many

vineyards. The company board also monitors risk management and strategies are in place

to ensure improvements continue in this area. Systems to manage and identify risk are in

place and include financial and non-financial, such as environmental and investment risk

(Australian Vintage 2015). An insurance policy to in relation to global warming would be a

good way to ensure investors of any possible risk.

Exchange Rate Fluctuations

Another major risk to Australian Vintage Ltd. needs to constantly monitor is the fluctuating

Australian dollar (AUD). The reason for this, is that the AUD price can effect export trading

of wine across the world. In the years 1999 to 2002, the Australian dollar exchange rate

hovered around 57.6 cents. During this period, our wine export volume growth to the USA

averaged 31.6% per annum. If we compare that to the US market from 2005 to 2007, when

the Australian dollar exchange rate averaged 78.7 cents, the wine export volume growth

averaged only 3.5% per annum (Scott 2008, p. 63).

Currently, in 2015 the AUD sits at 73.24US cents (Dollar higher as Wall St gains 2015), which

is very similar to the rate from 2005 to 2007 when export trading was very challenging. For

Australian Vintage Ltd. to counter this risk, a strategy which has been employed is to lock

away a long term strategic China wide distribution agreement with COFCO Wine and Spirits.

Having a distribution footprint in China give the Australian Vintage Ltd. a fantastic platform

to build brand equity in this market space. Throughout China, COFCO has a substantial

distribution footprint, allowing wines to reach consumers all over the country (Ferrier 2014).

Australian Vintage Ltd. could also look into increasing their domestic markets further, which

grew by 25% in 2014 to ensure that sales continued to grow for particular brands (Ferrier

2004).

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Financial Management

Overall, the wine industry in general has to constantly monitor working capital and their

cash flow management. The reason for this, is that seasonal costs for companies such as

Australian Vintage Ltd. which include pruning, harvesting and processing can be quite

substantial and to cover these costs require cash in bank. Recent production costs shown

an average of $357 per tonne of grapes (Keys 2014, p. 11). This may prove why the 2014

vintage was down 19% last year to 124,000 tonnes (Ferrier, 2014) which is a reduction in the

amount of wine produced by Australian Vintage Ltd. The current production cost per litre

for Australian Vintage Ltd. remains higher which is a strategy that have employed to

minimise the risk of minimal cash flow. Other strategies the company could employ to

minimise cash flow risk may be the issuing of shares to improve capital, the selling off of an

underutilised vineyard or further borrowings from the bank. All strategies that the company

has employed recently to ensure strong financial management.

Australian Vintage Ltd – Final recommendations to client investment

Through a thorough financial investigation of Australian Vintage Ltd. the company has continued to increase its net profit since 2011 to over $10.5 million. This profit is set to continue to rise with a long term strategic China wide agreement now in place which will see wine exported to China while still increasing its presence throughout the United Kingdom and Europe. With an industry oversupply of grapes becoming a major issue (Tonkin 2015, p. 5), having long term contracts in place ensures sales and distribution will continue into the future.

Australian Vintage Ltd. is also quite liquid allowing short term financial commitments to be met, minimising the risk that current liabilities become too difficult to manage. Recent capital raising through an issue of shares has reduced the financial gearing to a comfortable 39% (Ferrier 2014, p. 3) currently. Financial institutions continue to support the company, confirming a three year lending facility has been recently finalised, further securing the financial stability of the business.

Having multiple sources of finance is important for a company like Australian Vintage Ltd. The main sources come from capital raising through issuing shares and borrowings from financial institutions. Other sources include the possibility on not paying out a dividend and retaining the earnings as well as reducing inventory levels through sales of stock. A very important factor that decreases the risk of investing in the company is the fact that the business has many different capabilities. From vineyards, boutique and bulk wine production and packaging to marketing and distribution, there are a number of areas that will produce an income for the business.

Strategies are also in place, constantly monitored at board level, to minimise the financial risk involved in the business. These strategies are frequently monitored and the company is always seeking improvement in risk management.

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Research conducted on the ASX website confirms the current share price of Australian Vintage Ltd. as at 15th October 2015 is 0.375 (ASX Limited 2015). Since 2010, the share price of this company has remained very constant with a slight increase over the last month.

The most recent dividend paid was 2.2 cents per share and is the fourth consecutive year a dividend has been paid (Ferrier 2014, p. 3). When comparing that to similar industry businesses, Treasury Wines Estate which produces 165,488 tonnes has a share price of 6.570 and paid a recent dividend of 8 cents per share (ASX Limited 2015). Although Treasury Wines Estate seems financially stable at present, the company has only been listed for four years. Comparing this to Australian Vintage Ltd. which has a proven record over a sustained period, I would be cautious investing in Treasury Wines Estate. Share buying potential would also be greater with Australian Vintage Ltd. as the price per share is considerably less.

Clearly, there is always risk when investing in a company, but given the points above in relation to Australian Vintage Ltd. I see no reason why my client should not consider investing in the company. The company’s future looks assured and is in a very healthy position financially. The directors are looking to roll over after a three year term which is always a good sign in business and with the diverse range of incomes streams, Australian Vintage Ltd. is a company that should be invested in.

Conclusion

It can be seen that Australian Vintage Ltd. is a sound business with many capabilities and strategies to manage these. The company continues to show a net profit, against the industry trend, is liquid and has a comfortable gearing ratio. Financial lenders are supportive with a recent lending facility locked away and a number of sources of finance strengthening the business. The report has proven that Australian Vintage Ltd. is a successful multi-facet company with risk management strategies in place to ensure continued success to investors long into the future.

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References

Atrill, P., McLaney, E. and Harvey, D. (2014) Accounting: An Introduction. 6th ed. Australia:

Pearson Education Australia.

AVG Australian Vintage LTD, ASX Limited, viewed 16 October 2015,

<http://www.asx.com.au/asx/research/company.do#!/AVG>

Australian Vintage Ltd 2015, Our Company, viewed 28 September 2015,

<http://www.australianvintage.com.au/>

Cook, P 2014, ‘Growing overseas markets ripe for Iowa exporters’, Corridor Business Journal,

vol. 16-22, pp. 12-20.

Duncan, E 2015, ‘Australian Vintage 2012 Annual Report’, HS2-ACC60004 Accounting and

Financial Decision Making, Learning materials on Blackboard, Swinburne University of

Technology, 1 September, viewed 5 October 2015.







Ferrier, I 2014, Chairman’s Report, viewed 28 September 2015,

<http://www.australianvintage.com.au/investors/the-year-in-review/chairmans-report/>

Gaidos, S 2014 ‘Grape Expectations’, Health Source-Consumer Edition, vol. 185, no. 4, pp.

20-24.

Keys, T 2013, ‘Banking on the wine industry- defining the lending environment between

banks and wineries’, Wine & Viticulture Journal, vol. 6-10, pp. 11-15.

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News Limited Copyright, Dollar higher as Wall st gains, views 2 October 2015,

<http://www.news.com.au/finance/markets/dollar-higher-as-wall-st-gains/story-fn6t6wad-

1227565537939>

Scott, J 2008, ‘Exchange rate woes – high Australian dollar continues to challenge wine

exporters’, Australian & New Zealand Wine Industry Journal, vol. 16-23, pp. 63-64.

The University of Melbourne 2009, Wine industry working towards climate change

adaptation, viewed 1 October 2015, <http://newsroom.melbourne.edu/news/n-64>

Tonkin, B 2015, Grape Growing in Australia, IBISWorld, A0131

Xinhua 2010, China’s population to near 1.4 billion by 2015, viewed 1 October 2015,

<http://www.chinadaily.com.cn/china/2010-07/04/content_10055250.htm>

assessment task 3 - final report

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